New code makes dividing up company assets easier
Among the myriad of changes introduced by the new Commercial Companies Code (CCC) to the way companies do business in Poland, a division of all or a portion of a company's assets has now achieved that lofty status of being governed by its own set of regulations.
All joking aside, prior to the adoption of the CCC, the division of a company could only be accomplished by following one or more of a series of convoluted and costly procedures. For instance, it was not uncommon for a company to first wind itself up and then reincorporate itself as two or more new companies. Another method was for a company to decrease its share capital and to transfer the resulting funds to another company. Both procedures involved a lengthy and complicated process, not to mention a huge cash outlay in the event the original company was required to pay off its debts as a prerequisite to the spin-off.
Under the CCC, a company's division is now more streamlined and cost-efficient. The CCC sets out four different mechanisms of the division of assets. The shareholders of a company may use any of these new methods to divide all or part of the company's assets as a tool to address conflicting interests of its major shareholders or simply as an efficient means to restructure a troubled company.
Before embarking upon the road to dividing up your company, you need to read the fine print. The CCC imposes some restrictions on the use of these streamlined procedures. In general, only a corporation may use the division procedures. Companies that are already in bankruptcy or in the process of liquidating may not turn to these procedures. Similarly, a joint stock company may not divide its assets until the shareholders have paid in all of its share capital.
A division may be accomplished by any one of the following methods:
The company transfers all of its assets to one or more existing companies (division by takeover).
The company transfers all of its assets to a newly formed company (division by formation of a new company).
The company transfers all of its assets to an existing company and to a newly formed company (division by takeover and formation of a company).
The company transfers a portion of its assets to an existing company or to a newly formed company (spin-off).
Needless to say, the first three division methods result in the dissolution of the original company. The benefit to a company wishing to dissolve itself by utilizing one of these three methods is the avoidance of lengthy and costly liquidation proceedings, which under the old commercial code would be mandatory.
The first step a company must take to divide all or part of its assets is to draw up a plan of attack. Similar to planning a merger with another firm, a company must prepare a written plan for dividing itself, including inter alia: the formula to be used in calculating the number of shares to be issued in exchange for the transferred assets, the procedure for allotting shares in the existing or newly formed companies receiving the assets, a detailed description of the assets and liabilities to be distributed, as well as any permits, concessions or reliefs to be transferred with the assets.
A series of reports follow on the heels of the division plan. Management boards of each company participating in the division must prepare a joint report justifying the planned division. Moreover, a court appointed expert must examine and opine on the plan.
Finally, and most importantly, the company's shareholders must approve the division. In non-public companies three quarters of the shareholders must vote for the division at a shareholders meeting at which at least 50% of the company's total share capital is present. In the event of a publicly traded company, a quorum is not required, and the majority needed to approve the division is only two-thirds of the votes cast. The actual percentage of votes necessary to approve a division may be higher, depending on the provisions of the company's charter. Once the company's shareholders have approved the intended division, the newly formed company created to receive the assets must be registered in the Commercial Register, or in the case of an existing company, its increase in share capital must be registered.
The CCC strives to protect minority shareholders during the division process from any dilution in the value of their shares as a result of the division. If the planned division calls for the original company's shareholders to receive shares in the company receiving the assets on less favorable terms than they have in the original company, the shareholders have the right to file an objection. If this occurs, the receiving company must repurchase the shares of the dissenting shareholders within three months of the division. Moreover, any shareholders who enjoyed special privileges in the original company must be provided similar privileges in the company receiving the assets.
The CCC also provides the company's creditors with certain protections. Most significantly, for three years following the announcement of the division, the participating companies, which received any assets, will be liable, jointly and severally, with the other participants, for the original company's obligations assigned in the division plan to the bidding companies or the newly formed companies. During this three-year period, each receiving company will be liable for the amount of the original company's debt up to the net value of the assets that was assigned to it in the plan.
The division of a company, whether intended to dissolve the company or not, has yet to be tested under the new regulations. Only time will tell if the new procedures will be interpreted by the regulatory authorities and courts in such a way as to permit the efficient and timely division of a company's assets.
This article has been prepared by Lejb Fogelman, the managing partner of Hunton & Williams' Warsaw office, with the assistance of Anna Trauman, an associate attorney.
